HSA question

[CJ631]

I paid for orthodontia (2nd round for son) using HSA funds.  Later found out that the insurance will cover 50% of the cost up to a maximum.  I haven't put any claim through the insurance as yet.  Because anything that is reimbursed to me by the insurance is technically no longer a valid medical/dental expense, if I never make a claim to the insurance and never receive reimbursement for the cost, then it is technically a valid dental expense and there will be no tax implications?   Please advise.  Originally thought because we reached the lifetime max for him it was not covered, but it was explained by the same insurance company that my employer was bought out and the same insurance under my new employer starts back at zero.  

I understood that it was better than trying to put all insurance reimbursements received back into the HSA to resolve the distribution - is that correct?

[hbl3973]

CJ631,

Didn't see your posting until just now.  You do have a choice, though not exactly the one you outlined.  (You can't "undo" a distribution.)

(A) Leave the tax return alone and don't ask for insurance reimbursement, or

(B) You can obtain insurance reimbursement and pay the 20% tax penalty for non-medical expenditures.  (If you've already filed, you can amend the return before April 18th to avoid any additional dings beyond the 20% penalty.) 

Option B makes financial sense as the insurance reimbursement is effectively a 100% credit from which the tax of 20%+your_marginal_tax_rate is subtracted.  Since even the highest marginal tax rate is far less than 80%, you come out ahead financially marking the reimbursed expenses as non-medical distributions.

[Critter-3]

If this is for the 2023 current tax year then go ahead and put in for the insurance claim and get the 50% back. Then going forward through the rest of this tax year do not use the HSA account to pay for the medical bills until you undone the excess withdrawal. At the end of the year you'll get a 1099-sa form showing how much of the distribution you you took and on the form 8889 you will enter all the medical expenses you incurred. The one should zero out the other and you have no penalties. FYI, in the future, you can pay medical bills outside of the HSA if you wish and then get reimbursed from the HSA account for what you paid out of pocket. This way you will never take an excess distribution from the HSA account. If you don't know how to get reimbursed from the HSA account then please direct the question to the HSA manager.

[BillM223]

You can "undo" a distribution from an HSA. You can petition the HSA custodian to recognize the payment from the HSA that you made as a "Mistaken Distribution". If this is accepted, then you will need to complete a form (it's probably online at the custodian's website) and send a check for the amount of the distribution to the custodian. Note that the HSA custodian does not have to accept your request, so be nice. Explaining that you were unaware that you had insurance coverage in your case would be good (if it comes up). Once accepted, the HSA custodian will send you an updated 1099-SA.

For more background, please see "HSA Mistaken Distributions" on page 1 of the 1099-SA instructions.

In the future, if you have expenses that may be covered by insurance, try to run the bill through your insurance first, then pay the remainder from your HSA. If the medical professional demands full payment immediately, then pay the full bill using your credit card (or whatever), then run the bill through your insurance for reimbursement, and when you have finally discovered the remainder, ask your HSA custodian for a reimbursement for the remainder. That is, at any point in the future, you can ask for a distribution to you from the HSA to pay for medical bills, so long as the HSA was active at the time that the expense was incurred. (yes, even years in the future). This means that even if you don't have enough dollars in the HSA at the time you find out what the remainder is, you can continue to contribute to the HSA until you have enough money and then ask for the reimbursement.

[CJ631]

Thank you everyone.  I petitioned the HSA Administrator to process a personal check to reimburse the amount as a "HSA mistaken distribution" using the correct HSA forms and documentation.  The amount is back in my HSA account and is not reflected on the 1099-SA as a distribution.